4091.T FY2024 Q4 Earnings Call Transcript
Date: 2024-05-13
Source: Financial Modeling Prep

Soichiro Momiyama: Ladies and gentlemen, thank you very much for taking time despite your busy schedules to attend today's Nippon Sansa Holdings Corporation Earnings Call to explain our Financial Results for the Fourth Quarter FY 2024. My name is Soichiro Momiyama from IR team. Thank you for joining this conference. Some housekeeping announcements. First, the conference materials are the financial results, pension and earnings core reference that we have just released. I would like all participants to help them out hand. Next, we have 3 main speakers today. Hamada, President and CEO; Draper, Senior Executive Officer, Group Finance and Accounting Officer and CFO; and Keita Kajiyama, General Manager of IR. In addition, Tsutomu Moroishi, Senior Executive Officer, Group Corporate Planning Office, Takeshi Miki, the Senior Executive Officer and CSO, Group Sustainability Management Office and Yoshida, General Manager of Accounting are also in attendance. As for the program for today, first, Hamada, President and CEO, Draper, CFO and Kajiyama, General Manager, IR, will present the fourth quarter financial results and FYE 2025 forecast along with the presentation materials. We have time for Q&A in the end. Zoom simultaneous interpretation function is available for English and Japanese. Please select the language you prefer to communicate with us in the Zoom control panel. [Operator Instructions] There are some housekeeping announcements from IR department.
Keita Kajiyama : I'm Kajiyama from IR department. I have one notification to make. In the notice concerning dividend from surplus released today, there was an incorrect unit of measure in the total amount of dividends and determined amount of dividends column in the Japanese version of the notice. We sincerely apologize for any inconvenience caused. Now we have promptly obtained the consent of the Tokyo Stock Exchange to release the correction. The English version of the release has not been corrected. This is end of my report. Thank you.
Soichiro Momiyama: Now, Hamada over to you.
Toshihiko Hamada: Good evening. In Tokyo, it's not yet dark outside. But good evening, everyone. This is Hamada of Nippon Sanso Holdings. Time flies and it's now time for us to give this financial report. Thank you very much for participating in our Q4 earnings call amid your busy schedule today. First, the global situation. The situation is not necessarily good. There's a series of conflicts between Israel and Islamic Organization Hamas and Russia's continuing its military attacks on Ukraine, geopolitical tensions remain high. And there's economic slowdown in China, high-level of interest rates in Europe and United States and the continuation of the Japanese yen depreciation, it's very difficult to forecast the future. And global inflation does seem to be settling down though. In this business climate, in our group, we have approximately 20,000 employees. All employees and staff have been making steady effort. And thanks to the cooperation of stakeholders, including customers. We are making steady progress with the final year goals of our medium-term management plan NS Vision 2026. I would therefore, at first, like to express my gratitude. Draper and Kajiyama will explain the details of our business performance later. And what is important now is the business environment surrounding our group. We have to have an accurate understanding of this. And based on this, we have to work on the goals outlined in NS Vision 2026 as well as the strategy of each segment. And we also have to consider the role of holdings, the holding company of the group. These are what I think are important points. I would now like to summarize the Q4 results as well as the full year. First, we've been trying to perform functions of industry's infrastructure, and we want to utilize our strength in industrial gas business. And as a result, we've been able to improve our performance. And I think this is the result of the customers appreciating our business. And secondly, we've been trying to utilize communication with stakeholders in our corporate management. Mr. Draper and the other members of the IR team together with myself, we've been increasing number of meetings with investors. And as a result, we've been able to receive a lot of feedback, and we are trying to utilize that feedback from investors as much as possible in our corporate management. Number three, we have been trying to contribute to the electronics industry development. And I will explain about the numbers later on. We are trying to contribute to the electronics industry development. But last year, we were in a difficult situation when it comes to gas demand. Semiconductor company's plant's utilization rate is not increasing. However, customers in the semiconductor industry, they are very quick to respond to change in needs. So we have to be ready to changes in demand as well. Therefore, investment, including capital investment, we made maximum effort in this regard in Japan and Taiwan. We do hope that the market, including four gases, will recover this year. And number four, pursue operational excellence and work hard and encourage each other among other segments. And operation does not have a narrow meaning. It's not just referring to manufacturing. When we say operational excellence, we refer to the company's business as a whole, and price management is particularly important. From the end of two years ago, we've been focusing on price management and this is proving to be effective. As a result, our numerical performance is improving. And number five, our core operating income exceeded the target of the NS Vision 2026. And in our medium-term management plan, we set the various KPIs. And in terms of profitability, improving profitability is one important KPI. And the core operating income amount, we've been able to grow significantly, which means that we've been able to successfully implement the focus themes that we formulated. And in May 2022, we announced the mainstream management plan in NS Vision 2026 and explained our initiatives for the four years through March 2026 along with the five key strategies or focus fields described here. This year will be the third year of NS Vision at 2026. So it will be exactly the turnaround point in the strategic review for the fourth quarter of the fiscal year ended March 2024. I would like to review the progress of various KPI targets in the first half of the management plan and explain the current situation and future of the electronics business, which we expect as a growth engine for the group. Now the medium term management plan, MTP, NS Vision 2026, sets financial KPI targets and non-financial KPI targets for the fiscal year ending March 2026. First, I will explain the progress of our financial KPIs using this slide. We have adopted five indicators as our financial KPI targets. As indicators for growth, number one, there is revenue followed by indicators for profitability, core operating income and EBITDA margin. And as safety indicator, we have adjusted net TE ratio. And as indicator for capital efficiency, we have ROCE after tax. These are the five financial indicators. And the previous minimum term management plan was called Ortus Stage 2, which ended in fiscal year ended 2021. And the following year, there was a lot of uncertainty because of the outbreak of COVID-19. As a result, we decided to delay a formulation of the next medium-term management plan by one year. So we were originally scheduling five years for this current medium term management plan. It's shortened to four years. In the fiscal year ended March 2023, the next year, the company is implementing its current medium term management plan as NS Vision 2026. When we formulated this medium-term plan, we set our targets based on the assumptions that the exchange rate around March 2022 were ¥115 to the dollar and ¥155 to the euro, a much higher yen than the current level. However, since the uncertainty of the global economy was high even at that time, we set revenue and core operating income in terms of a range, not in absolute terms, as you can see in this graph. Therefore, if this is converted using the average rate for the most recent period, the revenue will be about ¥1.1 trillion and the core operating income will be about ¥155 billion. Even if we consider the impact of exchange rate, we can say that revenue and income are on track to exceed our forecast. Return on capital employed is what we use to monitor capital efficiency. And this is the same as ROCE, return on invested capital. ROCE itself was introduced as a key management indicator in 2006, and it has been a familiar indicator since that time. From this NS Vision 2026, we have changed the numerator of the formula from core operating income to NOPAT, net operating profit after tax, to make it easier to compare with our competitors. The name of the indicator is also changed to ROCE after tax. We continued our effort to improve financial softness, and we've been able to continuously improve our profitability. As a result, we've cleared our target of 6%. Nevertheless, it is still at a low level compared to these major industry peers overseas, and we would like to improve it through the final year of the plan. Going back to EBITDA margin, compared with the first year of the medium-term management plan, there has been about a three point improvement but still there are two points up to our target. In addition, the adjusted net TE ratio has steadily improved despite the earlier redemption of ¥100 billion in hybrid financing in January 2024. Consequently, we think as of May 2024, the credit ratings of JCR is AA- and RNI A+ respectively, each improved by one notch. While some KPIs are exceeding the targets set for the final year of the medium-term management plan, as I mentioned before, in terms of profitability, there's still room for improvement. Therefore, we will implement strategic priorities to achieve even higher levels of profitability to achieve growth that exceeds GDP rates in all regions.
Soichiro Momiyama: Next, I will explain the status of non-financial KPIs. We have third-party certification for our key sustainability data to ensure reliability for external reference. The latest data is disclosed in the integrated report published in September each year. Please note that the actual figures in the stable are, therefore, not for the most recent term, but for FYE, March 2023. As in the previous fiscal year, we expect to disclose results for FIE March 2024 by September. Nippon Sanso Holdings has established the Sustainability Promotion Committee chaired by CSO, Nicky, to promote sustainability management in collaboration with operating companies and the fairness in each region. The committee promotes sustainability management as our forecast group wide strategy. In April 2023, MSCI score was upgraded from BB to BBB and FDSE score from 3.2 to 3.5 in June 2023. As a result, the group was selected for the first time for the ESG index and included in the investment portfolio of GPIF. We have been making steady progress of the sustainability management. Together with each of directors, executive officers and employees, we intend to contribute improving management while seriously listening to the requests and comments of investors and shareholders. Next, I will explain the current status and way forward of the electronics business expected to become a growth engine. Please refer to the right on the bottom left. In FYE 2024, the revenue to the electronics industry accounted for 17% of total sales, less than 20%. However, by segment, Japan and Asia and Oceania account for 28% and 40% of the total, respectively. However, the U.S. and Europe account for less than 10%, so I think there is a huge growth potential moving forward. The middle graph now shows a split by in the product in the sales to the electronics industry in each segment. For example, in Japan, sales of the general gases other than specialty gas, number two, the special gases and three, equipment and construction are mostly balanced. In the Asia Oceania region, Specialty Gas is account for about 70%. The trend differs by region. The right graph shows product revenue by segment. As you see, Japan in purple is large. As for the U.S., it's not zero. We provide nitrogen in a slight volume. Consolidated sales now to the electronics industry declined by 2% year-on-year. This term, we expect an increase of customers' CapEx and utilization rates. We intend to accelerate our group wide growth by responding to respective regional demands while promoting the total electronics strategy. To do so, the key to the next growth is to offer a one-step solution of supplying gases, specialty gases, nitrogen, dry air and other general gases combined with equipment, construction, engineering and other services in Europe, U.S. and Asia, and Oceania to meet the required specification of customers based on the accumulated knowledge, technology and experience of Japanese TNC for nearly four decades. Again, certain facility and construction were to be enhanced in Asia and Oceania. And using DX, quality management, inventory management will be progress moving forward. TNC has the organizational capability to offer solutions from the launch of customers' production plants, production to after sales service when the plant is up and running. We have been deploying this business in this field. We also have sufficient technical capability to synthesize, purify, mix, and manufacture new quality electronic material gases to meet customer specifications. Based on the idea of operational excellence to enhance the group's overall strength, the approach long refined in Japan, the proposal and offering of solution for the electronics industry and practice from each region have been shared among the heads of electronics businesses in Japan, U.S., Europe and East Asia to work together as a group to make further contribution to customers. In November 2021, we announced a plan to increase the production capacity of B2H6 Diborane, and it was completed in Japan at ROK during FIE March 2024. In China, it is scheduled to be completed in February 2025. This timing is adjusted to the plateau operation timing of our customers. Diborane is a difficult product to handle since it is easily explosive and highly degradable, flammable and toxic. In the production plant of Diborane, there were some accidents and incidents reported. It is used as a doping agent for boron in the semiconductor industry, and we have positioned Diborane as one of our strategic products, and we want to build on this strong manufacturer position while becoming the preferred supplier of choice for our customers. Next, I will explain about the future investment execution plan since Q1 FYE2022 disclosure to facilitate better grasping of our overall CapEx plan, we indicate the chart by customer industry. Continuous CapEx is essential to ensure our continued strong growth into the future. So that is the reason why we consider it is important to make the continuous CapEx. The backlog as of the end of FYE2024 is approximately ¥170 billion of which environment and hydrogen and social contribution related projects account for roughly 50%. As stated in the note at the bottom, the scope of aggregation is roughly ¥500 billion or above and the smaller amount is not included. We intend to continue indicating our growth potential in this manner quarterly to share the results of our CapEx. Now our CFO, Draper, will walk through the financial results overview for the fourth quarter.
Alan Draper: Thank you, Hamada. Hello, everyone. Thank you for joining our call. I'll begin with our fourth quarter financial overview followed by insight into the full year, then I'll provide an outlook for next fiscal year and an update on how we expect to progress in the final year of our midterm plan. Afterwards, the call will be passed over to Keita Kajiyama, NSHD's General Manager of IR. So during the fourth quarter for the January through March period, excluding currency, NSHD reported a sales decrease of minus 2.7%. However, these results were negatively impacted due to a conversion of a Japanese subsidiary to a joint operation entity and also due to the ownership interest reduction related to the LPG business in Japan. Excluding both the currency impact and these business reorganization activities, sales were essentially flat year-over-year with positive price offset by lower cost pass through and a little bit softer volume. COI or core operating income improved .7 billion or 16%. Ex currency, COI grew at 7.2% for the quarter. The team continues with solid price management and is working diligently on productivity initiatives and globalization efforts. In addition, core OI margin improved in the fourth quarter versus prior year by 140 basis points to 12.7% and EBITDA advanced to 21.7% an increase of 180 basis points. As noted on Page 34 of the slide deck, Q4 contains an 8.8 billion non-cash and non tax affected gain because of the LPG business ownership interest reduction. That's included in non-operating. This item has a meaningful impact on the fourth quarter and full year effective tax rate as well as net income and should be considered for forward going projections. Shifting to the full year, sales ex currency were up 0.7%. Adjusting for both currency and the business reorganization activities previously mentioned, sales were up 2.2% with strong price partially offset by cost pass through and volume reduction. COI excluding currency was up a robust 27% with COI margin expansion of 280 basis points and EBITDA margin expansion of 290 basis points. I'm now going to turn the page over to cash flows, page 37. Cash flows were solid with operating cash flows up 28 billion or nearly 15%. Capital expenditures and investments were up 26.6 billion or 27% as we continue to make investments for our future success. The capital spend was lower than expected as project projected spend or project spend shifted to early fiscal year '25. We don't see major issues with either the underlying construction or construction timeline as a result. We continue to see significant project opportunities ahead and we'll prioritize capital for those projects that deliver the best economic and strategic value for our investors. In addition, I'm very pleased with our EBITDA to debt position. As you know, in the past, we were near five times. And with the fiscal year ‘24 closeout, we ended this year with an EBITDA to debt of 3.4 times, which shows solid work in progress made over the past few years. In addition, I'd like to reiterate that our dividend policy remains unchanged. We are committed to issuing dividends to shareholders in a stable and reliable manner. Supporting this commitment, we will propose to our shareholders at the annual general shareholders meeting on June 19th to raise our dividend 20% from ¥20 to ¥24 per share. Since fiscal year ending March 31, 2014, we've increased the dividend annually to compounded annual growth rate or CAGR of approximately 14%. Page 28. With respect to fiscal year end 2025 budget, first, you have to consider that our outlook is using the same average currency rate as fiscal year '24, with the main two currencies being the U.S. dollar at ¥145.31 to and the euro at ¥157.72. Secondly, we expect to maintain strong price management, robust productivity and globalization initiatives, a recovery in electronics, positive trends in food, beverage, home care and health care, and also positive attributes from internal and external carbon neutral initiatives. We expect steel, automobiles, and manufacturing to be stable and chemicals to be a bit weak still. As a result, we expect sales to increase 3.6% or $45 billion to ¥1.3 trillion in fiscal year 2025 and COI to increase by 6.6% to ¥177 billion. All businesses are expected to contribute to the MSHD Group's growth and margin expansion. Lastly, in response to the many investor requests for financial update as to the expectations of the final year of our MTP fiscal year March 26th, I'll make a few comments and we will also include some comments in the May 22 investor meeting. The estimates provided that that I'm going to provide assume constant currency with fiscal year '24 actuals, fiscal year '25 budget, and now the '26 outlook that I'm going to talk about. We expect sales to grow at a minimum of 2.5% above the fiscal year-end 2025 budget of ¥1.3 trillion and the Core OI to grow at a minimum of 5% higher than fiscal year 2025 budget of ¥177 billion. To clarify, these are the minimum growth rates that we expect to deliver on top of the fiscal year '25 budget as outlined on page 28 and is our current expectation for fiscal year '26. Overall, MSHD remains well position to grow solid returns, to grow our business in terms of both quantity and quality of earnings and to improve our financial health. Thank you for your attention. I will now turn the call over to Kajiyama to provide a detailed update on segment performance. Kajiyama, please.
Keita Kajiyama: I will now explain the Q4 performance by segment. I will explain using the financial results supplementary materials posted on our website. Please refer to it if you have it with you. First, CFO, Alan Draper, already explained our Q4 performance numbers. But if I may touch upon the business environment in Q4, against the backdrop of geopolitical tension in Ukraine and the Middle East, there was continuous supply chain disruption, trade friction, increase in commodity price, logistics cost and labor cost due to inflation and further weakening of the Japanese yen. While energy prices showed signs of stabilizing in some countries and regions, the manufacturing industry, mainly chemicals was particularly affected by the economic slowdown in China and demand in the semiconductor industry has yet to fully recover, though it is said to have bottomed out. Under these circumstances, although there was a conversion of a Japanese subsidiary to a joint operation entity and deconsolidation, which had a negative impact on revenue in Japan, because of price pass through of increased cost in each region and other price management efforts as well as a continuous focus on group wide productivity improvement. Q4 consolidated income increased year-on-year as explained before. I will explain the Q4 results by segment. For the full year performance, please refer to Page 20 onwards after the information about the Q4 results. The ForEx impact is calculated as written on Page 3 by applying the average rate for each currency for the period under review as the base rate and comparing it to the previous year. ¥1 depreciation against the U.S. dollar has an impact of approximately positive ¥2.4 billion on revenue and positive ¥350 million on cooperating income, while against the euro, impact of about ¥1.9 billion on revenue and ¥350 million on core operating income. The consolidated Q4 results for the fiscal year ended March 2024 were just explained by CFO, Alan Draper. And I will now explain the Q4 situation by segment. First, Japan on Page 15. Revenue was ¥108.8 billion, a decrease of ¥11 billion or 9.2% year-on-year. Excluding ForEx impact of approximately positive ¥100 million revenue decreased by ¥11.2 billion or 9.4%. The factors behind decrease in revenue were the significant impact of conversion of a subsidiary from on-site production facility to joint operation and the deconsolidation of a residential use LPG gas subsidiary, as well as impact of lower shipment volume of packaged and bulk air separation gas, which are core products and LP gas and weakening of electronic material gas shipment volume. In equipment and installation, revenue of industrial gas related products increased, but for electronics. Since sales of relatively large equipment and installation projects were proportional to the progress of the projects and were not concentrated at the end of the fiscal year, there was a year-on-year decline in revenue. As for segment income, against the backdrop of soaring labor and logistics costs, we continue to focus on price management, but because of weaker shipment volume of air separation gas and electronic material gas, as mentioned before, and cost for deconsolidation of a subsidiary, disposal of underutilized assets, facility maintenance and repair as well as one off office and research facility relocation costs. Second income was ¥9.7 billion and ¥1.8 billion or 15.7% decline year-on-year. There was some positive Forex impact on segment income, and excluding this impact, segment income declined by 9.4%. And excluding one off costs in Q4, segment income was almost flat year-on-year. Next, Q4 performance of Gas Business in the United States on Page 16. Revenue in the U.S. Was ¥89.8 billion, a year-on-year increase of ¥10.4 billion or 13.1%. Excluding Forex impact of positive ¥9.6 billion, revenue increased by ¥700 million or 0.8%. Shipment volume of core product as separation gas increased. And although there was decline in sales of industrial gas related equipment and installation, electronic sales increased, and we continued price management effort, which led to an increase in segment revenue. Segment income was ¥14.1 billion a year-on-year increase of ¥3.2 billion or 28.7%. Forex impact was positive ¥1.3 billion and excluding this impact, segment income rose by ¥1.8 billion or 15.2%. Shipment volume of air separation gas was favorable. And in addition to benefit from price management, in line with cost increase and continuous effort to promote productivity improvement program, there was an increase in segment income. Next, Gas Business in Europe on Page 17. Revenue in Europe was ¥79.3 billion, a year-on-year increase of ¥9.8 billion or 14%. Forex impact was positive ¥8.8 billion and excluding this impact, revenue increased by ¥900 million or 1.3%. Shipment volume of core products and separation gas declined slightly for packaged and bulk gas. But due to benefit from price management in line with commodity price hike, there was an increase in revenue. Segment income was ¥13.6 billion, a year-on-year increase of ¥4.1 billion or 43.3%. Forex impact was positive ¥1.3 billion and excluding this impact, the increase was ¥2.8 billion or 26.7%. The manufactures contributing to increase in segment income were effective price management, productivity improvement and cost reduction effort.
Unidentified Company Representative : Next, Asia and Oceania on page 18. In Asia and Oceania, shipment volume of the core product, namely the packaged and the bulk separator gases, declined, and the sales of electronic material gases in East Asia fell substantially year-on-year. Meanwhile, sales volume increased in industry gas largely sold in Australia. As a result, revenue increased by ¥3.8 billion year-on-year to ¥40.8 billion or 10% increase. Forex impact is positive ¥3 billion. Excluding this impact, net sales in the business increased by ¥7 billion. Next, segment income increased by the ¥100 million or 4.5% year-on-year to ¥3.2 billion. However, ForEx impact had a positive impact of 300 million. And excluding this impact, then the profit was decreased by 100 million or negative 3.5%. Next, Thermos on Page 19. Revenues amounted to 7.6 billion an increase of 100 million or 0.7% year-on-year, but excluding ForEx impact of approximately 100 million, revenues were down slightly by 0.3%. Sales of disposables in Japan, which accounts for more than 80% of sales, were strong while sales in ROK and production plants in Asia were flat year-on-year. On the other hand, the sales at Equity Method Affiliates were weak. Segment income was 1.2 billion, a decrease of 300 million or 20.5% year-on-year. Excluding the slight ForEx impact, the profit decreased by 22.8%. Although we set new prices for new products launched from time-to-time taking into account the weaker yen, we were affected by higher production cost due to the ongoing depreciation of yen. That concludes an explanation of each segment performance in Q4. As said, Page 20 onwards show the full year results as explained earlier. So this was already covered by CFO, Alan Draper. So I will make a slight additional explanation. Non-recurring items in the full year results for FYE March 2024 on Page 21 amounted to ¥6 billion, of which the breakdown as shown on Page 34 includes an accounting gain resulting from a change in the shareholding ratio of subsidiary in Japan. IFRS and operating income, including nonrecurring gains and losses was ¥122 billion an increased of ¥52.5 billion or 43.9% year-on-year. In the appendix from Page 31 onwards, the key management indicated a summary cash flow and a summary statement of the financial position for FYE March 2024 are presented. In the key management indicators on Page 35, ROCE after tax, which is also included as a financial KPI in MTP increased by 1.3% year-on-year to 6.7%. And the adjusted D/E ratio improved significantly from 0.81 at the end of the previous term to 0.74x. CapEx and investment also increased steadily towards the future growth of the company with a year-on-year increase of ¥26.1 billion to ¥120.8 billion. This is the end of the explanation of the Q4 results now for FYE to March 2024. CFO has already explained the forecast for FYE March 2025, so I will skip that part. On May 22nd, our CEO, Mr. Hamada, and our CFO, Mr. Alan Draper, will hold an earnings results briefing. The heads of each segment will participate in the briefing to discuss our initiatives for the current term. So I would be grateful if you could attend and deepen your understanding of your business. Toshihiko continues my explanation. Thank you very much.
Toshihiko Hamada: President Hamada, Mr. Draper CFO and Mr. Kajama, Head of IR, thank you very much for our presentations. For now, we would like to have some time for question and answers. And there are some points to keep in mind. As mentioned at the beginning of this conference, if you would like to communicate in a Q&A session in English, please join us via English audio line in Zoom. Please note that when Mr. Draper English speaker as his questions, the Japanese audio on Zoom will be translated by simultaneous interpreters. In addition, we would appreciate it if you could pay attention to your talking speed, talk at a moderate speed, as we will be providing interpretation audio by simultaneous interpreters.
Unidentified Analyst : From Morgan Stanley, MUFG Securities. This is Watanabe. I have two questions or three questions. I will be brief. Number one, about the Japan segment. Q4, there's one-off item, one-off expense. And excluding that, performance was almost flat year-on-year, ¥1.8 billion one-off expenses that is quite understanding please allow me to confirm. And in Japan, is major gas price have taking place and is there, if a last-minute demand is having an impact on revenue, please indicate. So this fiscal year, are you, have you already been able to make some price hikes this fiscal year? Please comment if that is the case. Thank you very much.
Toshihiko Hamada: Cylinder price hike. We are not seeing a significant last-minute demand, not as much as to say last minute demand. We emphasize the fact that there's a synergy price hike and we have been taking action. And after the start of the new fiscal year, a price hike is to be reflected. And the one-off item, I'd like to call upon our CFO, Alan, to explain about this one-off item.
Alan Draper: Thank you for the question. Your understanding is correct. Between the TN Energy deconsolidation, some special refurbishments we had to do at a plant, as well as a relocation that we did, those items are pretty much nonrecurring from our normal standard. And if you back those out, we're about flat year-over-year on profit.
Unidentified Analyst: My second question about the U.S. segment. Q3 core operating income, ¥12.4 billion, up to ¥14.1 billion. There's an increase in the profit level and margin improving from 14.2% to 15.7% and from Q3 to Q4, there's been an improvement in the U.S. Could you please explain about this improvement in a bit more detail? This is my second question about the U.S.
Alan Draper: So overall, with the U.S. business, there's a couple factors. One is they've been maintaining price actions, and, the overall underlying costs have been slowing down a bit or moderating. So they're getting benefit with higher pricing and less costs and lower costs as we go along. While there's still inflation, it's certainly not to the levels that we saw, three, six, nine months ago. So the primary drivers are related to maintaining price with the moderating costs.
Unidentified Analyst: My third and last question is about capital investment CapEx. The fiscal year that just ended, on an annual basis, I think you mentioned about ¥140 billion was the full year CapEx. But I think actuality compared to the forecast ¥140 billion, I think actual was ¥120 billion. Please refer to any delays and how much CapEx are you expecting for this fiscal year, FYE 2025? If you can comment by business segment, if there are any trends by segment, please comment on them as well.
Unidentified Company Representative: Concerning CapEx, the actual CapEx was below the plan. That is correct. And I had a discussion about details with the CFO the other day. And the U.S. llarge capital investment project is there's a timing difference of this through the next fiscal year, and there were some orders that we could not take. And as a result, CapEx is lower than originally planned. However, there's some CapEx projects postponed from last fiscal year to this fiscal year, and this means that there are some projects that we are likely to receive orders for this year. And I would like call upon Alan to explain the numbers later on. But we are expecting an increase in CapEx this fiscal year. Alan, if you could please explain in more detail.
Alan Draper : So overall, we're expecting CapEx next year to be, probably about a ¥165 billion So overall, some carryover from last year as Hamada as mentioned. And then, obviously, we're still having an uptick in spending. So, probably around 165 billion or maybe just a little bit higher than that, but right in that range.
Operator: [indiscernible].
Unidentified Analyst: I've got three questions as well. FYE March 2025 New Year's volume forecast, the sales will exceed 3.6%. So is that due to volume increase or price hike? Could you give us a sense? That's question number one.
Unidentified Company Representative: By each respective categories and depending on the customer profile, volumes are different. So it's difficult to say in a simple way. But roughly speaking, we do not expect a big volume increase for existing customers and the volume increase is not as much. As said, electronics volume will recover, and this is primarily in Europe as a new business or the cultivating new users, medical and health care volume will increase. So for existing customers, as the outset, due to geopolitical issues impacting on, and we had a huge concern on it. But in any business areas, we do not expect a huge decline. Is it slightly lower or flat? And there are some other in the business expecting a recovery. More in details. Alan, if you have any further supplemental comment, please.
Alan Draper: So as Hamada mentioned, certain markets and segments may have some negative volumes. But in total, for each segment, we were not providing, you know, budget detail level by segment. But we do see positive volume contributions for each overall segment. So while there's some puts and takes by market within a business, we're expecting positive contribution from all segments on a volume perspective.
Toshihiko Hamada: Just one supplement, the pricing, the price revision. If necessary, we will do, we will take price action. But utility costs, that is the biggest impacting factor for us. The power rate trend. Depending on the country, the situation is different. But no huge spike is anticipated in any region. So rather than taking pricing action, but we will ensure the price for the purpose of ensuring stable supply because now there are some other factors of the labor cost increase and so forth other than the utility cost. So taking into consideration of those, then we maintain the price or offer some price hike. That's all. Thank you.
Unidentified Analyst : Thank you very much. The second question is also related to the pricing. The Japanese price hike has been announced since February. So what is the progress so far?
Toshihiko Hamada: The price hike in Japan, primarily for cylinder gas. So no, this has been executed. For the market in helium, putting aside in the helium, but, and then we are proposing price hike for cylinder gas. Basically, price hike action has been initiated since Q4 last year, but the result will come out from April onward. So honestly speaking, we don't see much contribution due to price hike yet.
Unidentified Analyst: Last question, also on price. In Europe, in Q4, pricing trend could you share with us? Energy price has been gone down in Europe as well. On the other hand, non-energy dependent price hike might have been executed. So what has been the trend of the prices in Europe? The details, I don't have the data with me, so I will hand over to Alan for the details. Not just in Europe, but in the U.S. as well, there are some pass-through mechanisms incorporated in the contract. When the utility cost has been gone down or up, then those are passed on into the price. So depending on the market in Europe, it's difficult to tell the details. But due to the cost pass through mechanism, there are the sum and the product price being decreased due to the utility costs and so forth, but mostly the price has been maintained. That's my interpretation. But depending on the region and depending on the type of gas, there are some variations. So if Alan can supplement, please?
Alan Draper: So as Hamada mentioned, contractually in U.S. and Europe and places in Asia as well. We have GDP or inflation factors that will have adjustments on our contracts. So those continue no matter what the situation is. So we follow the contracts from those that perspective. So that will continue forward. When it comes to, how did Europe do, they had basically low-single-digit pricing in the fourth quarter. So they're still maintaining some price year-over-year. And they're also as you as, Hamada mentioned, have significant pass through and surcharge reduction because the costs have been moderating.
Operator: Next, UBS Securities [indiscernible].
Unidentified Analyst: This is [indiscernible] from UBS Securities. First, about capital investment backlog. ¥170 billion is the backlog written in the presentation material. And what percentage of this would be projects project backlog that constantly generate cash flow?
Unidentified Company Representative: I'm trying to look up if Mr. Kajiyama or Mr. Draper has the numbers, please explain. Your question is about CapEx. So a lot of the CapEx plans are over the long-term. One, rather than one off projects, in a lot of our CapEx plans, we are expecting to recover cost. We are expecting a payback. I don't have the specific percentage in mind, so if either Kajiyama or Alan has the numbers, please.
Alan Draper: This is Alan Draper. So, overall, when you look at the projects that we have in this list, it's all projects that are over [¥500 billion]. So we do have a conglomeration or aggregation of projects that I'll say are growth projects, projects that are cost reduction projects, replacement projects. So we don't have the detail to provide the exact cash generating. But cash generation is not just revenue, it's also reduction of cost. So, but it's a combination of that those details. We don't have those, available, and I don't think we've ever disclosed those. So I apologize for not being able to answer more clearly. Thank you.
Unidentified Analyst : And Mr. [indiscernible] has a comment. ¥170 billion out of this capital investment backlog, almost all are capital investment by the company that generates revenue. And I'm not sure if I understood your question accurately or correctly, but after completion of all projects, we are expecting either revenue or profit. That's how the company understands all of our CapEx projects to be. Number two. Mr. Hamada, at the outset, you mentioned that you tried to fit in the gap between the company's understanding and the stakeholders' understanding as much as possible, and you tried to utilize feedback from stakeholders in corporate management as much as possible. What were some of the main gaps between understanding between the company and stakeholders? And how do you intend to utilize feedback from stakeholders in your corporate management going forward? Could you please explain in a bit more detail?
Toshihiko Hamada: Alan Draper was the person who communicated most with stakeholders, but so I would like to call upon Alan to explain as well. But there was not necessarily a gap between our understanding and the stakeholders' understanding, but we are working on operational excellence to try to maximize revenue. And in carbon neutrality, we are working on various initiatives. And considering our main business gas, there is oxygen, nitrogen and argon, the gas products. This is well understood by many investors. But in order to supply gas, what are we doing? In order to supply gas, what kind of cost reduction do we have to conduct? This kind of explanation was not made in detail from the company. So we received questions as to what kind of efforts we are making in this regard. So we explained what we are doing to improve operational excellence and what initiatives we are taking for productivity initiatives. And through this explanation, we were able to discover that that we have to explain in this much detail. We are trying to implement various initiatives. And it was not that there was a major change in our initiative or the direction that we are heading towards. But in order for us to be understood better by stakeholders, we discovered that we have to explain in more detail. Alan?
Alan Draper: Thank you, [indiscernible]. This is Alan. So overall, some of the things that we've heard from investors over the last several years, one is in regard to backlog. We want to be able to be more transparent in our spend, what our backlog is. So that's something that was introduced as a result of investor interest and investors sending the message that that more information is wanted. In addition, we've been working hard at coming up with, additional variance reporting similar to our competitors. Therefore, we can dissect the total group by sales, volumes versus currency versus pass through versus price. And that's something that I'm starting to refer to and communicate on these calls when you ask questions about price. So that's another item that was really requested by investors. So we listen to an investor request. Those are two examples. The other items that have also been asked, we've heard comments about equity compensation. Right now, we don't have an equity compensation program. It's something we'd like to introduce. But we obviously have to have the Board of Directors of the compensation committee to be engaged in that. But it's something we've heard from investors, and we like the idea, and we'd like to proceed with that. So that's another example. And maybe the last one that we hear about is we have a lot of, we don't have a lot of specialists. We have a lot of generalists, and we probably need to expand our specialist area. So, for example, someone who's a specialist in taxes, we have to look at. Maybe a global CIO is something we have to go towards. So these are some of the additional things that we've heard from investors. We've also wanted to do them ourselves, and we're looking into doing those in the future. So these are some of the ideas and communication we've had with investors.
Unidentified Analyst: By the way, about shareholder return, what kind of, discussions did you have with stakeholders about shareholder return? And what conclusion do you have?
Unidentified Company Representative: There were no particular numerical requests from stakeholders with regards to shareholder return, but we are continuously mentioning that investment and return would have to be well balanced. We have to repay our debt and we have to be able to strike the best balance. And in addition, dividend amount, a dividend payment amount, we have to disclose the numbers as specifically as possible. At least, I have not heard of any specific shareholder return numerical customer investors. But here again, Alan has been communicating more. So if you know something.
Alan Draper: I don't have anything to add. It was more of a discussion on trying to tie executive compensation to equity performance and shareholder returns. So we've not touch touched on anything in specifics, but it's something that we we're interested in and we'd like to pursue in the future.
Operator: Next, Daiwa Securities. Ikeda please.
Hiroki Ikeda: I'm Ikeda from Daiwa Securities. I just have one question for confirmation. On Page 8, financial KPI to be enhanced for the higher level? So what sort of concrete target and what level is defined as high? Maybe you can touch upon that the next weeks in the meeting.
Unidentified Company Representative: As for the concur figures we're not ready to mentioned, but we have rough picture. But there are some items, which are not hitting the target, especially concerning profitability related indicators. So we aim to achieve those indicators. And Core OI, how to perceive. We are not in the planning the review of MTP. So in the coming year or two, our forecast is the considered by, I mean, the finance and the corporate planning. So Alan, could you comment on that?
Alan Draper: Yes. So this is Alan. Overall, we're still focusing, as Hamada mentioned, you know, on the EBITDA margin target, for example. You know, I think our target across the group was to have above 17% EBITDA margin. So we're not there yet. We're still pushing on companies to make sure they improve their margins, whether that be through pricing actions, productivity, cost reduction. So we'll continue to target that one. So for example, EBITDA, we're still fighting and pushing towards our midterm plan goal, that we set out two years ago. So, that's an example. Core OI and obviously EBITDA quality quantity is well above where we expected, but we're still working on that quality of earnings. So that's an area that we're going to still work on and target, but we'll provide a little bit more detail on the next meeting on 22nd. Thank you.
Operator: Next, CLSA Securities, [indiscernible].
Unidentified Analyst : Yes. Good afternoon. This is [Yifan] from CSA, and thank you much for taking my questions. So I have two questions in hand. So first, congratulations on your delivery of solid results and basically the first question is regarding the semiconductor gases because we would expect a recovery in the gas demand. And could you elaborate more on your growth in this area? And is there any kind of applications that you run as well as the HBM applications? And that's about it.
Toshihiko Hamada: Thank you very much. Semiconductor material gas, there are various kinds of semiconductor material gases, and NSHT is not supplying all types of gases, but particularly memory related NAND, DRAM. There are large users in that industry and production volume. For these kinds of semiconductor material gases are likely to recover significantly. However, as of now, have we seen a robust recovery? Not yet. From the end of last year, we've been discussing about when we can see recovery, not only within our company, but including experts as well. But gradually, the timing of recovery is being delayed. And in our company, when are we going to see recovery in numbers? And when can we recover to below the decline? We have to wait until this year or the beginning of next year to clearly see when we can see a full-fledged recovery. Therefore, we do not expect a significant contribution this fiscal year. A third or a quarter, we do expect recovery, but not full-fledged recovery. And various new types of gases are being requested. Diborane B286, for example, has been a very important semiconductor material gas that's been used from before as well as etching related gas in the 2 nano or 7 nano, they are now taken for granted. But highly integrated semiconductor related gases, we are seeing an increase in demand here. And I'm not sure whether I can call this a guess, but various materials using lithography device as well as facility and equipment that we're offering as well. And here, we are expecting earlier recovery than recovery for semiconductor related gases.
Unidentified Analyst: Could I have a rough idea what is the breakdown for your applications? So could you, say about, let's say, 30% is logic and 70% is for memory and within memory is about half is DRAM or NAND. Could we say that or not?
Unidentified Company Representative: As I briefly mentioned before, memory related. Because, of, a customer situation, I cannot give you a breakdown of memory or DRAM, NAND or DRAM, but gas demand is extremely high for memory related. I have 40 years’ experience, but I'm not an expert. But I think about the 70% is for memory related gas. I think about 70% of semiconductor memory related gas is memory related. And other than that, there's gas used for highly integrated semiconductors. And there are also highly special materials that are not gas. And we have just started to offer these equipments. They were not so much time has passed since they were developed, but we do have those products as well. In terms of price, there might be a significant impact. But in terms of volume, memory accounts for a very large portion of our semiconductor business. And memory and logic, semiconductor use for automobiles, for example, has not dropped so much. But memory as a whole is declining, so, that impacted our company's performance as well. That's the sense I have.
Unidentified Analyst: And my second question comes to your relationship with Mitsubishi Chemical. I think it's a very sensitive and very difficult question, but a little bit kind of, could you give us a little bit color? Because your market cap is about 50% higher than your parent company. Is there any kind of request from your parent company to help them or any kind of things you can do to contribute to their growth or any kind of potential kind of changes according to future prospect? And that's it.
Unidentified Company Representative: Yes. It is true that market cap at NSHD is higher than our parent company, but the relationship between us and Mitsubishi Chemical is based on a contract. And just because, there's reversal in the market cap, the relationship is not to be impacted. And I think you are aware, very well of the fact that. MSHD is making a significant contribution to, in terms of revenue, because, our main business is industrial gas, and the industrial gas performance is at a very high-level, and we've been able to increase price. And we are working on operational excellence. Because of these reasons, we have been able to generate very solid revenue. And this strong performance, of course, will be returned to Mitsubishi Chemical, and we would like to continue our effort no more or nothing less than that. We are not considering a change in relationship between MSHD and Mitsubishi Chemical. Thank you.
Keita Kajiyama: Thank you very much for your questions. In the interest of time and the questions that we couldn't take, we would like to respond to it on one-on-one basis. With this, we would like to conclude the fourth quarter FYE2024 earnings call. The content of today's conference call will be posted on the IR website based on the recorded data. Thank you very much for taking time out of the busy schedules and to participate in today's conference call and for your many questions.